The trustees of a pension fund would like to examine the issue of protecting the bonds in...

80.2K

Verified Solution

Question

Finance

The trustees of a pension fund would like to examine the issueof protecting the bonds
in the fundâ€™s portfolio against an increase in interest ratesusing options and futures.
Before discussing this with their external bond fund manager,they decide to ask four
consultants about their recommendations as to what should bedone at this time. It turns
out that each of them has a different recommendation. ConsultantA suggests selling
covered calls, Consultant B suggests doing nothing at all,Consultant C suggests selling
interest rate futures, and Consultant D suggests buying puts.The reason for their different
recommendations is that although all consultants understand thepension fundâ€™s objective
of minimizing risk, they differ with one another in regards totheir outlook on future
interest rates. One of the consultants believes interest ratesare headed downward, one has
no opinion, one believes that the interest rates would notchange much in either direction,
and one believes that the interest rates are headed upward.Based on the consultantsâ€™
recommendations, could you identify the outlook of eachconsultant?

Answer & Explanation Solved by verified expert

4.5 Ratings (744 Votes)

A covered call is when a call option is sold on an asset that is owned It is a strategy used when one believes there is not much probability of an upward move or a downward move in the asset price A downmove will be protected to some extent by the See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member